Flexible PPP Project Funding Needed

Funding PPP projects is a core content across many provisions of the draft PPP Law and clearly demonstrates the equality for all PPP stakeholders. This content was also actively debated by experts when they raised their opinions to the latest drafting.

At the online workshop on “PPP Project Funding and Monitoring Mechanisms” co-hosted by the Institute for Policy Studies and Media Development (IPS) and the United States Agency for International Development (USAID), Mr. Tran Chung, Chairman of the Vietnam Association of Road Traffic Investors (VARSI), said, in PPP projects, the owner’s equity is 20%, the governmental fund is 20%, and bank loans make up the remainder. Funding is always a challenge for PPP investment, not only during but also after construction.

Balancing ratio of funding

Dr. Doan The Loi, Former Director of the Institute of Economic and Irrigation Management, said, it is not advisable to place an upper limit of state funding in PPP projects. The government should fund PPP projects in two phases: Site clearance preparation and construction. If it focuses on only site clearance, it may lead to project suspension. For example, it is very difficult to carry out an irrigation project and rural clean water supply project if the fund is capped at VND200 billion.

Mr. Tran Duy Hung, Director of Monitor Consulting Company, said, a separate budget line or a separate fund should be established to finance PPP projects. The government fund in PPP project is seed money, which is very important to promote projects. Accordingly, in Article 75, if a PPP project is not included in the list of medium-term public investment projects, competent authorities shall formulate those medium-term plans, used back-fund for medium-term investment plans.

Given more than 300 PPP projects launched, the government fund is only spent on site clearance. None of the projects use construction funds, except for Phan Thiet - Dau Giay project. Capping public investment funds in projects integrated into medium-term public investment planning will lack flexibility, hardly manage fiscal risks.

According to VARSI, arranging the credit fund for PPP projects is also very difficult and time-consuming due to huge value and long maturity (over 15 years on average). According to current regulations, the owner’s equity is at least 15% in a project, but banks usually require a higher rate to ensure debt repayment when they appraise and grant credit. In case the owner’s equity falls short, the project must have additional funding sources such as loans from investors and additional government fund, resulting in long project appraisal and funding arrangement. In particular, banks often require to arrange sufficient capital to sign a credit contract or disburse the fund, thus slowing down projects. VARSI proposed that the State budget should be supplemented at the beginning to ensure project feasibility and accelerate fund arrangement.

In addition, BOT projects often lack money for interest in early years of operation (due to low operating revenues and high interest expenses). Therefore, VARSI thinks that the government fund should offset the short cash flows in the early stage of operation to ensure project feasibility and attract investors and credit granting banks.

Additional benefits to lenders

Mr. Doan Giang, an international expert on PPP, said that 80% of PPP funding is from banks; therefore, banks pay high heeds to their interests. In the latest draft of the PPP Law, we are concerned about the rights of lending parties when problems arise. When investors fail to pay debt, banks only inform the investor via competent authorities to recommend other investors in place, rather than appoint new ones. This is thus contrary to international practice.

“If banks are allowed to appoint investors in the event of an emerging problem, this is a way to ensure that the service is still provided if there is a problem between investors and lenders. Therefore, the law should be revised to endow lenders with the right to propose an alternative investor in case their loan contracts have problems,” he added.

Mr. Dao Viet Dung, a senior expert on state management and PPP, said, project finance must be prepared right from the beginning - this stage determines the success or failure of the project. However, the draft PPP Law stipulates that project preparation must be within the 5-year budget review. “Based on ADB's experience in project preparation, we face a lot of difficulties on this,” he said.

Mr. Dung noted, to ensure project feasibility, there should be a separate budget line for the project. PPP is not entirely a public investment. If it is tied to a medium-term public investment plan, it will be difficult to manage it. When there is a separate budget line, investors will see that the Government has a clear, flexible commitment and they will feel secure. When banks provide loans with low risks, investors find it easier to borrow cheaper money. In addition, it is necessary to improve the governance role of the Ministry of Finance in this process.

By Huong Ly, Vietnam Business Forum